Warrant Pricing: A Review of Theoretical and Empirical Research

摘要

The paper studies the pricing of warrants. It begins by considering option pricing models. These models fall into one of two categories: (1) ad hoc models; and (2) the Black/Scholes model and its subsequent modifications. The parameter of the Black/Scholes model that is most difficult to estimate, i.e. the standard deviation of the rates of return on the underlying stock, will be considered. This is followed by a discussion of alternative option pricing models, based on the Black/Scholes model. The most important difference between warrants and call-options is then discussed. This is, that exercise of a warrant, in contrary to exercise of a call-option, leads to a creation of new shares. This causes an additional valuation-problem, the so-called 'dilution problem'. Attention will be paid to empirical tests of option pricing models for the valuation of warrants. After having reviewed the theory of option- and warrant-pricing one is able to construct a methodology for the pricing of warrants.